The new law will close a legal loophole preventing banks from repossessing homes.

The Irish Independent reports that Prime Minister Enda Kenny is also due to revamp a cabinet committee to closely hold the banks to account.

The report says that the banks will deal with distressed mortgages systematically in whatever way is appropriate, such as split mortgages, interest only, or debt writedowns but there will not be blanket writedowns of negative equity.

It also says that, in the vast majority of cases, where borrowers have engaged with their lenders, they will continue to live in their houses.

Government sources said: “The vast majority of mortgage arrears cases will be dealt with through these sustainable modifications but there will inevitably be cases where repossessions are the only option.”

The number of Irish mortgages in arrears for more than three months currently stands at 86,000, or 11 per cent of all mortgages.

Another 50,000 are in arrears of up to 90 days and taking in restructured mortgages while opposition parties say one in five mortgages is in distress.

In the buy-to-let sector, close to 50,000 of the 150,000 investor mortgages were either in arrears or the mortgage holder had to make arrangements to reduce payments.

Irish PM Kenny said: “Resolving the banking system and mortgage issue is the next big challenge facing the Government.

“I will have a plan for dealing with the issue of distressed mortgages in a fortnight.”